Summer in Ukraine has the nation basking in weather as hot as the winter was harsh, with signs that the economy is turning around after the severe recession of 2009, when gross domestic product plunged 15 percent.
Click here to view ‘Consumer optimism subsides’ graph and text.
Moreover, the new political unity brought on by President Viktor Yanukovych’s victory this year has allowed for passage of a budget with a deficit low enough to meet International Monetary Fund requirements for resumption of lending frozen in November. Ukraine is looking to get $14.9 billion.
So what could spoil this pleasant picture? Plenty, as it turns out.
As European Union countries slash government spending to appease bond markets whose investors are balking at huge budget deficits, the prospect of a return to recession so soon after the 2008 global financial crisis – the much-feared “double dip”– is looming.
An EU double-dip recession would certainly hurt Ukraine’s crucial steel exports that have been slowly lifting the country out of the abyss of 2009, when national gross domestic product slumped 15 percent. But analysts say the country is more vulnerable to a slowdown in China than another tumble in Europe.
“Downward revision of economic prospects in emerging Asian economies in 2010 could have more pronounced effect on the demand for Ukrainian steel than problems in Europe.”
– Oleksandr Lozovyi, Phoenix Capital.
Finances continue to trouble many nations, including the United Kingdom, Greece, Italy, Spain, Portugal and Ireland – all of whom have opted for austerity budgets to appease bond markets. The budget reductions are expected to curb growth and create more unemployment, possibly triggering a new recession.
If Europe slid into recession, Ukraine’s economic recovery — dependent on global commodity markets, especially steel – could halt. The EU accounts for 15 percent of Ukrainian ferrous metal exports. A Europe-wide recession would “impact pretty quick on prices and demand for Ukrainian steel,” said Serhyi Gayda of Dragon Capital, simply due to its impact on the global steel market.
But most of Ukraine’s steel exports go to the Near and Middle East, with Turkey and Lebanon together accounting for 18 percent of exports, according to Gayda. Turkey’s economy is still looking robust, with “no data that points to a double dip” said Ali Cakiroglu of Erste Securities Istanbul.
Analysts are also uncertain how a double-dip recession will affect Ukraine’s steel export market.
But some impact of the EU crisis is already noticeable on global steel markets. While prices rose 50-60 percent between early December and early May, largely on the back of Chinese demand, they have since fallen again about 10 percent and counting.
“This partly reflects seasonal factors and partly consumers taking a pause and balking at high prices, but there is also an element of caution about growth in the wake of the Euro-zone debt crisis and possible contagion risks,” said VTB Capital analyst Wiktor Bielski.
The main threat to Ukraine’s crucial steel exports comes however from Asia, not Europe, according to analysts. While China has powered ahead in the first half of 2010 with 11 percent growth, driving commodity markets back up, its rulers are worried about overheating and are trying to cool things down. If they succeed, this will hurt global steel prices further.
“Downward revision of economic prospects in emerging Asian economies in 2010 could have more pronounced effect on the demand for Ukrainian steel than problems in Europe,” said Phoenix Capital’s Oleksandr Lozovyi. “But we still expect world demand for steel to increase in the fourth quarter of 2010 after the moderation of recent months.”
“Recently we have indeed seen some deterioration in steel prices,” says Maryan Zablotskyy of Erste Bank Ukraine. “Should there be a bigger loss of confidence in China’s real estate market or commodity prices remain subdued for a longer period of time, we could see a slowdown of growth momentum.”
“Ukraine is still exposed through the commodity channel, given metals account for 40 percent of exports. That said … the economy is still in bounce-back mode. The hryvnia is still under-valued.”
– Tim Ash, an analyst at the Royal Bank of Scotland.
One factor protecting Ukraine against a double-dip recession is, regrettably, that many sectors still have failed to recover from 2009. Thus, despite European ownership of the majority of Ukraine’s top 10 banks, a new European downturn is unlikely to cause much ripple, since bank lending still remains moribund since the 2008 crisis. Non-performing loans remain at 25-30 percent of portfolios, according to ING Bank’s Oleksandr Pechertsyn.
Ukraine is also not greatly exposed to bond market worries over sovereign debt, since it is being financed by the IMF, World Bank, EU and Russia at below-market rates, which has allowed the government to forego an attempt to raise $1.5 billion in private markets.
Instead, the government has opted to make painful spending cuts and hike natural gas prices to domestic users, as well as borrow domestically.
Neither consumer spending nor construction has significantly re-started after the crisis, so those sectors are slow anyway.
“Ukraine is still exposed through the commodity channel, given metals account for 40 percent of exports,” said Tim Ash, an analyst at the Royal Bank of Scotland. “That said … the economy is still in bounce-back mode. The hryvnia is still under-valued. The balance of payments, meanwhile, looks solid. ‘Hot’ money also largely left in 2008-2009.”
Consumer optimism subsides
A study released on July 21 shows that consumer confidence in Ukraine has either tapered off or is on the verge of dipping after recovering gradually from a sharp plunge triggered by the 2009 global recession.
Produced jointly by market research firm GfK Ukraine and the Kyiv-based International Centre for Policy Studies, the survey showed that, after growing uninterruptedly for 10 months, the Consumer Confidence Index in Ukraine slipped 2.6 percentage points to 94.5 in June 2010.
The reason for this decline in the consumer mood was a 6.3 percentage point drop in economic expectations, which settled at a still-optimistic 102.6. “The positive effect of the change of administration on the consumer mood in Ukraine is fading,” said Maksym Boroda, manager of ICPS’s social economy program. “This is completely in line with a slip in the ratings of President [Viktor Yanukovych], [his] Party of the Regions, and government institutions which was seen in June.”
According to the study organizers, consumer confidence suffered from many factors, including a recent slowdown in Ukraine’s economy “possibly related to the difficult situation in the steel industry,” budget cuts adopted by the new government, plans to raise the retirement age, a push to adopt a draft new tax code that would have hurt small businesses, and expectations of higher prices for natural gas and communal heating and housing services.
Kyiv Post staff writer Graham Stack can be reached at [email protected]
